Alliance outlook: “World not awash with sheepmeat”

Murray Taggart speaking to shareholders at the Alliance supplier roadshow

Looking ahead at the 2018-2019 meat export season, sheepmeat processor and exporter, Alliance Group is signalling “a little bit of nervousness” around the all-time high prices being achieved for sheepmeat and the uncertainty around Brexit.

“Farmers are obviously concerned that when livestock prices have peaked previously they’ve crashed pretty soon afterwards,” says Alliance chairman Murray Taggart, who’s been talking about the topic during the co-operative’s annual roadshow run, now half way through its 24-venue programme.

“What we’re trying to communicate is yes, there are customers around the world who are struggling to adjust to the new paradigm of pricing. In saying that, the world’s not awash with sheepmeat.”

Taggart explains that while Australia has had a drought and had a “reasonably vigorous” kill, it seems the market has been able to absorb that without major price implications, which differs from past Australian droughts.

“The other thing when you look at our situation – and we suspect other companies are the same – there’s not a whole lot of product in the fridge trying to find a market, we’re actually pretty well cleaned out and the pipeline’s not very full either,” he says, adding those sorts of fundamentals mean a crash is unlikely.

“Of course, the prices you’re seeing right at this point in time are the peak of the off-season pricing, there will always be the normal easing of pricing as the proportion of chilled eases and the volumes come on.”

The co-operative has forecast to pay its farmer suppliers $6.50-$8.10 per kg for lamb in the first quarter and, as chilled supply eases off, this will drop to $6.40-$6.50 per kg in Q2. For sheep, the budget is between $4.50-4.95 per kg for the two quarters.

Alliance is expecting the mid-season pricing to be significantly higher than what it was last year, but Taggart cautions: “There’s a long way to go till then. Who knows what the exchange rate will be or what the weather conditions will be and then you’ve got all the macro-economic factors like China/US trade tension.”

He points to the result from the latter – a big build-up of pork in North America – which inevitably might have a flow on effect on other proteins. Manufacturing beef is competing in very much the same space as the pork, he says.

Taggart not bullish on beef

Beef has been tougher for Alliance in 2018-2019.

“Prices were stronger at procurement than the market indicated they should have been for much of the season.

“So, beef margins have been compressed from a processing perspective and obviously farmers have been feeling ‘I thought it was going to be worse than this’ ”.

With Australia now exporting a lot of beef and parts of the US doing the same, again because of drought, even though there are some offsets around the world, he doesn’t think the outlook for beef is “particularly bullish”.

The company knows it needs to get more out of its beef products and will be focusing on improving returns from the meat in the coming year, roadshow goers have been learning.

Alliance beef schedule prices are forecast for: prime cattle to range between $4.80 to $5.50/kg in the first quarter, dropping back to $4.80 to $5.30/kg in the second; for bull $4.80-$5.00/kg in Q1, dropping to $4.80-4.90/kg in Q2; and cow $4.00-$4.30/kg in Q1 and $3.80-$4.00/kg Q2.

Returns from venison were particularly high last season and he doesn’t see any reason for that to change in the short- to medium-term.

Challenges for business

However, he points to challenges for the red meat business in common across the sector – including extreme climatic events and finding enough skilled people to staff plants. Alliance is currently short of around 400 staff (including absenteeisms), but it’s an industry-wide issue, says Taggart. The Meat Industry Association has calculated there are about 2,000 meat processing staff short across the sector – filling those spaces would ensure maximum value can be extracted for the sector.

There is also the challenge of getting better alignment of animals to processing capacity throughout New Zealand.

“If that’s out of alignment, then it makes life challenging across the industry,” he notes.

Another underlying risk, outside company control, will be the way the exchange rate will go – up or down will make all the difference.

But, as a sheepmeat processor it’s the traditional markets – the UK and European Union – that are currently causing the co-operative the most concern.

He admits to being: “Pretty nervous about Brexit, to be perfectly honest. No one can claim to know what is going to happen,” he says, adding he’s pleased the red meat sector has its new Brexit representative, Jeff Grant, in place to work with people in the market.

“It’s not a very comfortable feeling when there’s no clarity around what’s going to happen. Has the UK had enough time to put rules and regulations in place and the policies for people to follow?” Taggart wants to know.

“If that hasn’t been done and D-Day comes you’re in a situation where no one knows what the rules are or what you need to do.”

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